Keep the Cuts, Cut the Breaks

December 2, 2010

Congress starts its lame duck session with a tax battle. Democrats want to extend, at least temporarily, the Bush tax cuts for families making under $250,000. Republicans want to extend the cuts for everyone forever. A better approach would be to keep all the cuts, but only on the condition that we pay for them by junking the tax breaks that corrode our economy, says Nicole Gelinas, the Searle Freedom Trust fellow at the Manhattan Institute.

The 2001 and 2003 Bush tax cuts only partly met the definition of successful policy.

The good: President George W. Bush and Congress slashed tax rates across the board, and tax rates on investment income came down significantly, too.

The bad: The government's tax take has never been enough to cover spending, meaning that year in and year out, Washington has piled onto an already big pile of debt borrowed from future taxpayers.

The ugly: The Bush tax cuts didn't simplify the tax code.

Congress has an opportunity now to fix the bad and the ugly, says Gelinas.

Extending the Bush tax cuts for families earning less than $250,000 likely would reduce tax revenue by $136 billion annually by 2013, according to Congress's Joint Committee on Taxation, so let's cut back elsewhere to pay for most of it.

Killing the deduction for mortgage interest for these families would save roughly $91 billion annually by 2013.

Eliminating their deduction for state and local taxes would save another $30 billion, good for a total of $121 billion in savings.

Washington can achieve sufficient savings for upper-income taxpayers to keep their tax rate cuts as well.

Keeping these tax cuts, including the lower rates on investment income, likely would reduce federal revenue by $50 billion annually by 2013.

But Congress could make up this figure by rolling back wealthier earners' tax breaks.

Chopping out their mortgage-interest deduction would save $43 billion, while slashing their deduction for state and local taxes would save another $31 billion, for a total of $74 billion.

Such savings measures are not just tax hikes in disguise -- they're spending cuts. Tax breaks, after all, are simply a pernicious way for the government to spend other people's money.